- Long-term incentives have become a common compensation element worldwide – also for employees at lower staff levels
- Successful companies rely heavily on long-term incentives across all staff levels
- All-employee long-term incentive plans are on the rise and offer excellent opportunities to increase corporate equity culture
- Results from the most recent Global Equity Insights 2015 survey
New York/London/Frankfurt am Main/ Zurich, June 24, 2015. Companies from North America, Europe, and other economic regions make every effort to develop and increase their equity culture. While North American companies are the pioneers of this development, companies from Europe and other economic regions are catching up. The different experiences with long-term incentive plans seem to be converging into a global market practice for some design features. Most notably, companies have substituted stock options, which were most popular during the 90s, by some form of full-value share grants that offer a more balanced risk-benefit profile than options. Today North American companies predominantly use restricted stock, while European companies prefer performance shares, and companies from other regions rely on both forms.
These are some of the key findings of the ”Global Equity Insights 2015” survey – a project conducted on behalf of Global Equity Organization (GEO) by the consulting firm hkp/// group and under academic monitoring of the Chair of Management and Control of the University of Göttingen/Germany. The survey was supported by SAP and Siemens as well as by Baker & McKenzie, Computershare, Discovery Communications and Equatex as sponsors – all with high stake in equity-based compensation. In 2015, 144 companies participated from 21 countries worldwide.
“This year’s survey offers comprehensive and detailed insights with regard to equity-based compensation plans with a special focus on long-term incentive plans (LTIP). Our analysis covers international market practice for long-term incentives, detects trends, and identifies relationships between plan design features, company performance, and employee satisfaction. It allows companies to assess their current LTI plans and practices and shows how such plans can contribute towards increasing business performance“, explains Danyle Anderson, Executive Director at GEO.
High performing organizations make increased use of long-term incentives
Survey results show that successful companies make more use of long-term incentive plans (LTIP). In particular, successful companies give more weight to LTIP in their compensation structure across all organizational levels. Differences in compensation structure are most pronounced for top management, where the LTIP share in the pay mix of management board/executive committee members in high performing companies is more than 25% higher than for management board/executive committee members in low performing companies.
Furthermore, employee participation in LTIP is positively related to company performance, i.e. in high performing companies, a bigger share of the total employee population takes part in LTIP. Hence, the extension of LTIP to a broader range of employees provides great potential for performance improvements. Such an extension increases the equity culture within the company, enhances long-term perspective, and creates sustainable value in the long-term.
Long-term incentives are becoming part of regular compensation packages
North American companies pioneered the use of LTIP, and they are still at the forefront of LTIP grants. Employees of North American companies receive a higher portion of long-term incentives than their European counterparts at all levels of corporate hierarchy. While European companies have recently made strong progress in the development of an equity culture, the gap between European and North American companies indicates considerable potential for further improvements.
Across all economic regions, the portion of long-term incentives decreases further down the corporate hierarchy – ranging from 37% for the management board/executive committee to 12% for middle management. The relatively unimportant role LTIP currently plays for the compensation of senior and middle managers provides an opportunity to better align their interests with the interests of shareholders.
Companies no longer use LTIP exclusively for the management board/executive committee, but commonly include executives and senior management. Almost all companies offer LTIP to executives, and 84% of companies extend LTIP to senior management. While eligibility significantly decreases at lower levels, there are tremendous differences between economic regions. More than 70% of North American companies offer LTIP to middle management, and more than half of these companies to other (key) staff. By contrast, middle management and other (key) staff are ineligible for LTIP at the majority of companies from Europe and other economic regions.
Regional differences in LTIP eligibility by level can partly explain differences in the relative coverage across all employees within companies. While almost one-third of employees are eligible to participate in LTIP in North American companies, eligibility drops to 14% in European companies.
Retention is the primary goal of LTIP
Data from this year’s survey confirms the steady decline of stock options as already observed in the last couple of years. While stock options were the predominant plan type a decade ago, they rank only third among the companies from Europe and North America. Apart from this similarity, the distribution of plan types differs markedly between European and North American companies. European companies prefer performance shares as a long-term incentive (31%) while North American companies prefer restricted stock (35%). Other plan types, namely performance cash, share matching, and equity and cash deferrals play only a minor role in the compensation mix.
Survey author Martin Pfändler, Senior Partner hkp/// group Switzerland, explains: “The preference for performance shares and restricted stock reflects the notion that stock awards provide a more balanced risk-benefit profile than stock options. In the aftermath of the financial crisis, politicians as well as the press argued that stock options caused excessive risk-taking and were therefore seen as a primary culprit of the financial meltdown.”
Demographic shifts and the recent economic recovery in most parts of the world have intensified the competition for talent, with many companies using LTIP to successfully draw sought-after employees. More than half of the companies surveyed regard retention as the first-order objective for LTIP implementation. However, companies also give high priority to market pay best practice, strategic considerations, identification with the company, and share ownership.
Regulators and proxy advisors contribute towards more balanced risk-benefit profiles
Recently, several governments around the world have proposed or passed laws requiring pay level caps. In our sample, almost 50% of companies currently apply caps on LTIP payouts. Another aspect of recent governance reforms is a stronger focus on shareholder rights. One prominent tool is “say-on-pay”, which extends shareholder voting rights on executive compensation at annual general meetings. Say-on-pay has increased both the influence of proxy advisors and institutional investors. Their recommendations significantly influence LTIP design in about 80% of the companies surveyed. Their influence is stronger in North America than in Europe. But even in Europe, only 27% of the companies participating in our survey did not take these external recommendations into account.
In addition, survey results point towards a trend towards longer vesting periods, which several institutional investors already require for the management board/executive committee. Current vesting periods are quite similar across all economic regions averaging 41 months. More than half of the companies implement vesting periods of 36 months, and almost one third extend their vesting periods up to 48 months.
Prof. Dr. Michael Wolff, Chair of Management and Control at the Georg-August-University Göttingen, concludes: “In combination, the different trends we observe draw a very clear picture of LTIP as a major compensation component for global organizations, focusing on long-term talent retention across all levels. The old days of highly volatile stock option plans for a handful of executives, which could pay out ten times as high as their fair value at grant have finally become a relic of the past.”
Survey Background
The “Global Equity Insights 2015” survey was conducted in the spring of 2015 on behalf of Global Equity Organization (GEO) by the consulting firm hkp/// group, under academic monitoring of the Chair of Management and Control of the University of Göttingen/Germany, and supported by SAP and Siemens as premium sponsors, by Baker & McKenzie, Computershare, Discovery Communications and Equatex as sponsors – all with high stake in equity-based compensation. In total, 144 companies participated, mostly global players from 21 countries, with special focus on North America and Europe, representing 10 key industries. 95% of the companies surveyed have a market capitalization above USD 1 billion, with the top 11% exceeding USD 100 billion in market capitalization at year-end 2014.
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